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Author: elambeth One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 8206  
Subject: Re: Parent vs Child Assets Date: 7/31/2001 1:30 PM
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Gary11112, in my humble opinion, you'd be silly not to game the system in the manner you have proposed.

My parents were entrepreneurs and owned their own business which in most years netted them in excess of $100,000 per year reportable income. Because they were a small business sole proprietorship, the IRS allwowed them to operate on cash-basis accounting. This meant that it was very easy to artificially induce large swings in income, for example by investing in a capital asset and writing it all off in a single year. (Note, there is nothing at all illegal about this.)

So during my four years in college, they made a number of major investments, drastically added to inventory, accelerated payables and deferred receivables, and played other accounting games. (Still legal, mind you.) Their reportable income dropped precipitously, to the sub-poverty-level range, in fact. As for asset valuation, most of their assets were tied up in the business, which owned our house, cars, etc. Because the valuation of a sole proprietorship is more art than science, and luckily the US economy was in a mild recession at the time, they were then able to reasonably maintain that the business was worth far less than the some of its parts. A $50,000 cash investment in illiquid inventory which might take two years to move at retail prices was quickly revalued to $5,000 over a period of weeks.

As a consequence, with both income and assets dramatically reduced, my entire education was financed by the US taxpayer. I qualified for pell grants for all four years, plus interest free loans, plus a number of other grants and need-based scholarships which were unique to my state and/or university. Never ONCE did any financial aid administrator raise any kind of eyebrow at any of this. The only problems I ever had with my financial aid were some minor matters pertaining to the reportability of my GI bill benefits.

There was a negative side to all this manipulation, which is that income in subsequent years was higher once all the capital investment activity and inventory buildup began to pay off. On balance, though, we came out far, far ahead. And it was all legal. Ethical? Well, you be your own judge on that. As for me, I graduated from college debt-free and bought a porsche instead of paying off student loans.

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